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Gisele and Moby Know Something These CEOs Don't

(Bloomberg Opinion) -- Despite drinking-straw bans, photos of tangled turtles and campaigning by celebrity influencers such as Gisele Bundchen and Chris Hemsworth, plastics have been booming in recent years.

Far from betting that heightened concerns about waste would eat into demand, the industry has been wagering on rapid growth.

Saudi Arabian Oil Co. signaled the direction of things in March by taking control of state chemicals giant Saudi Basic Industries Corp. in a $69 billion deal. Five months later it spent another $15 billion buying a fifth of Reliance Industries Ltd.’s Jamnagar refinery. The Indian plant is the world’s biggest, and is starting a transition to producing mainly jet fuel and petrochemicals.

In China, Hengli Petrochemical Co., Rongsheng Petro Chemical Co. and Sinochem Group Co. are spending billions building huge refineries that specialize in feedstocks for the plastic and chemicals industry. Amcor Ltd. last year paid $6.2 billion for its soft-plastics oriented peer Bemis Co.

There’s a reason for this. The oil industry takes seriously the prospect that electric vehicles, more efficient conventional cars, and growing market share for alternative sources of industrial power will eat into demand growth for transport fuels.

Consumption of fuel oil has already peaked and gasoline will follow late this decade even under current climate policies, according to the International Energy Agency. With more ambitious policies both fuels will see demand cut in half by 2040, and even kerosene and diesel would lose respectively about a quarter and a third of their current markets, the agency says. The key petrochemicals feedstock of naphtha, though, should see increasing consumption regardless of climate regulations, driven by rising demand for plastic and agricultural chemicals in developing countries.

The world currently uses about 50 kilograms (110 pounds) of plastics per person, per year. If the average rises to levels seen in rich countries, demand would double. Even Europe, which has been more active than most regions in trying to limit plastics consumption, has at best held production steady over the past decade.

Still, the risk to this bullish demand prospect is the possibility that Moby and Candice Swanepoel have a better handle on the direction of the plastics business than Saudi Aramco, Reliance and Amcor.

That doesn’t look nearly as unlikely as many would have thought a few years ago. Indian Prime Minister Narendra Modi promised to do away with single-use plastics in his independence day speech last August, and has since set a deadline of 2022. On Sunday, China’s economic planning agency announced that non-degradable plastic bags would be banned for many uses in swathes of the country by the end of the year, with further cuts planned by 2025.

Plastic-bag bans are already more prevalent in emerging countries than rich ones, with the likes of Bangladesh and Kenya leading the way long before wealthier nations caught on. Those rules have been widely flouted, or at best just resulted in disposable polyethylene bags being replaced by reusable polypropylene ones with little net effect on plastic resin consumption. Still, thriftier usage could cut oil demand from petrochemicals by 20%, according to Christof Ruhl, the former head of research for the Abu Dhabi Investment Authority.

As my colleague Adam Minter has written, plastics probably aren’t as fundamentally bad as they’re painted — but the announcements from China and India couldn’t be coming at a worse time. Thanks to all the new refining equipment put in for producing plastic feedstocks in recent years, prices have been slumping lately.

Futures prices on China’s Dalian exchange for polyethylene have fallen about 26% over the past two years and in November hit their lowest level since the 2008 financial crisis. Polypropylene is down by about 20%.

The Asian ethylene-naphtha spread, a key determinant of profits for plastics-focused refiners, collapsed over the past two years from a high of $802.50 a metric ton in early 2017 to less than $100 per ton late last year. Matters could well worsen this year as the U.S. boosts ethylene exports to mop up its own domestic glut of polymers, pushing yet more supply onto the Asian market.

For the most part, the refiners who’ve been betting on a bright future for plastics demand have been relaxed about these developments. Temporary oversupplies in downstream commodity markets are a normal event, and the likes of Reliance and Sinochem are still betting that the coming wave of demand will more than absorb the new supply they’re planning to set up.

Even so, the current state of the market should give those making major investments in hydrocarbon crackers pause.

Plastics demand has been remarkably resilient despite decades of attempted crackdowns in rich countries, but it’s more than just celebrities trying to reverse this trend. Should China and India follow where Kenya and California have led, plastic’s great future could be looking a lot more dim.

To contact the author of this story: David Fickling at dfickling@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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